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First take: Basel III large exposures framework

Overview

On April 15th, the Basel Committee on Banking Supervision (“BCBS”) released the final version of its “Supervisory Framework for Measuring and Controlling Large Exposures” (“SFLE”) that builds upon longstanding BCBS guidance on credit exposure concentrations. While the document provides insight into the global prudential framework for large exposures and details the treatment of specific exposures, the release raises the important question of how it will impact the US’s yet-to-be finalized Single Counterparty Credit Limit (“SCCL”) that the Fed left out of the recently finalized Enhanced Prudential Standards (“EPS”). See PwC’s Enhanced prudential standards first take (February 2014).

The BCBS approach is generally less stringent than the US’s proposed SCCL. However, the SFLE does not clarify whether key exposures will ultimately be included such as securities financing transactions (“SFTs”) and qualifying central clearing counterparties (“QCCPs”) – which the SFLE subjects to interim measurement approaches. This lack of clarity further muddies the ultimate impact of the SFLE on the SCCL (as does the SFLE’s long implementation timeframe through 2019). One thing is clear: evolving regulatory expectations are driving the need for increasingly granular data, and for new risk measures targeting macro (as well as micro) prudential bank supervision.

BCBS sets the G-SIB to G-SIB limit at 15% of Tier 1 capital, which is more lenient than the SCCL proposal’s 10% limit.

BCBS uses a more moderate capital measure – Tier 1.

The SFLE factors fewer exposures into its limit, by using a narrower “control” definition of connected counterparties than does SCCL.

Analysis of connected counterparties is complex under the SFLE’s “economic interdependence” definition.